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Alarm Signal in Economy

Jyotiraditya Scindia

In Budget 2003-04, Finance Minister Jaswant Singh has outlined the various problems afflicting the country today. He has also offered solutions. Unfortunately, at best, these are only short-term solutions. With the economy continuing to be a cause for worry as is evident from the falling GDP growth rate, it is difficult to share his optimism about the macroeconomic conditions of the nation being better than ever before. In fact, whether he admits to it or not, the picture is not too pretty at all.

The growth rate, rising from 5.1 percent in 1992 to 8 percent in 1996, dropped to 4.4 percent in 2002-03 from 5.6 percent in fiscal 2001-02. Agriculture registered a fall of 3.1 percent with foodgrain production declining by 13.6 percent to 183.2 million tonnes in 2002-03. To describe the recent pick-up in industry as ‘recovery’ is being in denial.

China’s success in maintaining and even exceeding 8 percent GDP growth rate lies in its high savings rate of 40 percent and high investment rate of 36 percent. In contrast, India’s investment rate in the past two years was 23.3-24 percent. If 8 percent GDP growth is to be achieved, India’s investment rate will have to rise to 32 percent and domestic savings to 30 percent from the present level of 24 percent. Singh referred to the "panch priorities" which the NDA government is planning to focus on : poverty eradication, education, employment, agriculture and infrastructure. The report card of each is dismal.

Poverty Eradication : It is shameful that in a country with a food surplus, we are still witnessing starvation deaths. Instead of channelising the existing foodstocks towards a massive food-for-work programme, the government’s inability to put in place appropriate policies and galvanize the PDS has kept the overflowing foodstocks way beyond the reach of those below the poverty line (BPL). The government has missed an opportunity to provide food and employment to the poor. By allocating Rs. 507 crore for the Antyodaya Anna Yojana, each of the 50 lakh BPL families will get a meagre Rs. 2.80 per day — an amount insufficient to provide them food even for a month.

Education : If children are a nation’s future, India seems to be destroying its own tomorrow. The gap between rhetoric and actual performance is glaring. Out of every Rs. 100 spent by the Centre, only Re 1 has been spent on education, 34 paise on health and 45 paise on child development.

India, shamefully, has the highest number of illiterates in the world. During the Congress rule during 1991-96, the government had pledged to raise expenditure on education from 3.8 percent of GDP to 6 percent by 2002. Under the BJP rule, this figure has actually fallen to 2.5 percent. The abdication of the government’s responsibility towards education is evident from the paltry increase in allocation to education in 2003-04 — a rise of a mere Rs. 400 crore to Rs. 9,625 crore. Nearly 35 million or one-third of Indian children between 6 and 10 don’t go to school.

Employment : The experience of 1993-97 shows that when the economy expanded by more than 7 percent per annum, not only did the poverty rate decline rapidly but the number of people seeking jobs registered with employment exchanges also fell. Job opportunities in the organized sector have stopped growing and are now actually shrinking. It fell by 0.15 percent in 2000 and 0.38 percent in 2001. In the last four years, 3 million young people saw dreams of earning a living vanish and have been banished to the category of educated unemployed. All these are contrary to the prime minister’s recent statement in Parliament regarding the government’s promise of creating 1 crore jobs annually.

Agriculture : If Indira Gandhi launched the Green Revolution., Rajiv Gandhi gave the fillip to agricultural production through technology missions. This culminated in India’s farm production reaching an all-time high growth of 16.3 percent. What we need today is a third agricultural revolution that shifts away from staple to high value crops with an emphasis on food processing. This will allow farmers to ‘forward-integrate’ and ensure them maximum share in the value chain. The finance minister should tell us why the sectoral central plan outlays on agriculture, rural development and irrigation have fallen as per the revised estimates. The share of public investment in agriculture has fallen from 33 percent in 1994 to 24 percent in 2002. We desperately need a radical programme for the drought-hit area along with an effective watershed and ground water management system.

Infrastructure : Budget 2003-04 contains great plans to revitalize India’s infrastructure. It envisages spending Rs. 60,000 crore. However, a look at the fine print shows that the government will only be a subsidy provider and not actually be spending on creating physical assets. Faced with a high deficit, it will be difficult for it to bring in large investment — which in turn means that there will be no worthwhile public investment. There is neither any indication of the private sector stepping in to fill the gap nor any groundwork being done in terms of listing such projects along with an expression of interest.

The government announced with great fanfare the Accelerated Power Development Programme (APDP) last year. But revised estimates show that the outlay has decreased by 68 percent from Rs. 3,500 crore to Rs. 1.089 crore. The outlay of the ministry of power has been hiked by a meager Rs. 1,200 crore to Rs. 14,668 crore in the current fiscal — an inadequate hike to meet the demand for power. No effort has been made to curb the massive 30.9 percent transmission and distribution loss. Commercial loss on account of power shortages/theft has reached a stunning 1 percent of GDP (Rs. 24,000 crore) a year. The result : black-outs will become a regular feature hampering industrial production and irrigation.

If this is the fate of the much touted ‘panch priorities’, the future looks bleak. Strangely, no reference was made in the budget to the status of the Fiscal Responsibility Bill pending for the last two years. In projecting the fiscal deficit target at 5.6 percent of the GDP, the finance ministry has chosen to ignore major liabilities. First, while the Centre has sought to reduce the debt swap (Rs. 10,000 crore over three years), it has failed to account for the interest foregone. Second, the rise in LPG/kerosene subsidies, triggered by a sharp increase in global oil prices, has been ignored. Third, the budget provides for only Rs. 700 crore as immediate compensation for reserve shortfall following the abolition of sales tax collection of Rs. 93,000 crore and its replacement by VAT.

These are only a few imponderables. The real alarm is in the unbridled increase in revenue deficit — up from 2.4 percent of the GDP in 1996-97 to 4.3 percent today. Increasingly, the government is financing current consumption by high borrowings. Debt servicing now constitutes 70 percent of the tax revenue and the national debt is 85 percent of the GDP — not too far behind Pakistan’s 105 percent. Rising interest payments, subsidies, defence and salaries, pre-empt 98 percent of government revenues. That leaves virtually nothing for creating new assets. The declining interest rates and choking of savings avenues will hit domestic savings and investment. The budget contains nothing to avoid this conflict. To ignore the very real fear of an economic downturn is to live in a fool’s paradise.